Site selection experts say decreasing hospital costs is critical for economic development.

The state’s largest healthcare system has announced sweeping plans for “a renewed commitment to price affordability.” Indiana’s high hospital costs have become a hot topic after a recent study from the RAND Corp. found that Indiana ranked the highest for hospital costs among the 25 states that were analyzed. On the heels of announcing a price freeze in late 2021, IU Health approved a major funding plan in recent weeks that provides more detail on how it will drive down hospital pricing to the national average for commercial insurance by the end of 2025—including a $600 million direct commitment to community health programs.  

Decreasing hospital costs is critical for economic development, says site selection experts. Indiana’s higher healthcare costs—on top of poor stats in smoking, obesity, diabetes and opioid misuse—can cause pause for companies looking at the state.

The RAND study from 2020 showed IU Health as the most expensive hospital system in central Indiana, charging private health plans 333% higher than what it charged Medicare.

IU Health Chief Financial Officer Jennifer Alvey characterizes the health system’s high hospital costs as an anomaly when one considers the bigger picture; she says the total price of care encompasses many aspects, such as a primary care visit, a trip to the local pharmacy or a stay at a long-term care facility.

“[The RAND study] showed our hospital prices are higher than the national average, but when you look at our physician prices, they’re much lower,” says Alvey. “When you consider total price and total cost across the entire spectrum…[IU Health] looks more on a national average. But when you take just one component of it, that’s where we were able to see the hospital aspect of it was higher than the national average. So that’s where we’ve been focusing: let’s get to that national average. That’s going to take us a couple of years to make sure we do it right.”

Alvey says a key piece of the multi-year plan is shifting IU Health to a value-based healthcare delivery model and away from a fee-for-service model. In the value-based model, hospitals are paid based on patient health outcomes; this differs from fee-for-service, in which hospitals are paid based on the amount of healthcare services they deliver. Alvey says the majority of hospitals in the U.S. are still reimbursed using a fee-for-service model.

“We think by committing to our value-based care and focusing on providing more value—rather than getting paid on fee-for-service, where every time you do something we would’ve gotten paid in the past—will…have higher quality and lower cost. So we’re shifting those reimbursement methods…that’s going to help.”

Alvey says IU Health also knows “we need to be more efficient” and is leveraging technology and innovation to help “do things in a more efficient way.”

A major piece of the funding plan announced just weeks ago pledged $500 million for health-related community development in the neighborhoods surrounding the downtown Indianapolis campus. An additional $100 million will be contributed to the IU Health Community Impact Investment Fund. Alvey says “if our community is healthier, the cost of care goes down” by keeping people out of the hospital.

“[The money] will help support our community health initiatives, education, workforce development and neighborhoods around the downtown Indianapolis campus,” says Alvey. “There are great opportunities to partner with the different neighborhoods, especially with the new academic health center going up in downtown Indianapolis.”

Alvey notes IU Health is facing economic headwinds; a workforce shortage and inflation driving up the cost of labor, supplies, drugs and large construction projects have “made it extremely difficult to do what we said we’re going to do, but we’ve made a commitment, and so we are absolutely going to deliver on that.”  

“We want Indiana to be a healthier state. We also want a strong economy, and we feel like we’re doing our part,” says Alvey. “To have the cutting-edge medicine and the physicians we do—being able to do that here in Indiana and not have to go somewhere else in the country is what every Hoosier deserves. And I think we’re on a great path to also ensure that’s very affordable as well.”

Alvey says IU Health now provides patients with detailed estimates of out-of-pocket costs for scheduled services prior to visits.

Alvey says IU Health will need help from other stakeholders to change Indiana’s poor public health stats.